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Core-Mark Holding Company, Inc.  (NASDAQ:CORE)
Q4 2018 Earnings Conference Call
March 01, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to the Core-Mark 2018 Fourth Quarter Investor call. My name is Paulette and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Ms. Milton Draper. You may begin.

Milton Gray Draper -- Director of Investor Relations

Thank you, Paulette. I'd like to welcome everyone to Core-Mark's fourth quarter 2018 investor call. Joining me today are Scott McPherson, our President and Chief Executive Officer; and Chris Miller, our Chief Financial Officer. Also in the room is Matt Tachouet, our Chief Accounting Officer. Core-Mark issued its earnings press release earlier this morning. You can find a copy of it on our website under the Investor Relations tab.

Today's discussion will include both GAAP and non-GAAP financial measures. A reconciliation to GAAP of these non-GAAP financial measures is included in the earnings press release. We will also be discussing forward-looking statements. These forward-looking statements are subject to risk and uncertainties. Actual results may differ materially from management's current expectations. We refer to you to the documents we periodically file with the SEC, specifically our 10-K and our 10-Q for discussion of risks that may affect our future results.

I'll now turn the call over to Scott McPherson.

Scott E. McPherson -- President and Chief Executive Officer

Welcome to the Core-Mark's 2018 year-end call and thanks for joining us. We're hosting our final call from San Francisco this morning. All of our future calls will be broadcast from our new corporate office in Westlake, Texas. Chris Miller is here with me, and we will take your questions after our remarks.

Core-Mark's headline for 2018 is we delivered on the profit commitments to our shareholders with 21% EBITDA growth for the year. Solid non-cigarette sales and margin improvement, accompanied by our progress and leveraging OpEx led to a record year of $164.7 million of EBITDA.

We were focused on rebounding from a challenging year in '17. And based on a '18's progress, I'm confident we have built a solid foundation to deliver the steady, long-term profitable growth that Core-Mark's shareholders come to expect. 2018 included key accomplishments as well as some industry challenges, but in all we're executing well against our strategic framework built around growing sales and margin faster than the industry, building on our leadership position in providing category management solutions and leveraging our cost structure.

First, I'll summarize a few key highlights from the full year. We increased revenue 4.5%, helped by success in driving non-cigarette sales and execution on our category management strategies, which led to margin growth of 24 basis points. On the market share front, we grew our independent store count by 500 locations. As previously discussed, the bid cycle for large new opportunities was limited in 2018.

However, we closed the year on a high note with the renewal of our MAPCO contract and finalized agreements with two strong mid-sized chains that will begin distribution in early 2019. From an operating leverage standpoint, warehouse was the biggest highlight in '18 with a 5% increase in throughput. Transportation leverage continued to be a challenge, although we did manage to reduce turnover and improve key performance metrics. Overall warehouse delivery and facility expense, as a percent of remaining gross profit, decreased from 63.6% to 62.5% and SG&A came in essentially flat, largely due to one-time expenses and legal and higher bad debt. Total OpEx leverage, as a percent of remaining gross profit, improved to approximately 92% compared to 93% in '17 and was a strong contributor to our profit performance.

On the category management front, we did a great job of capitalizing on the emerging trends in alternative nicotine and continue to see the growth in our food categories. Assisting convenience retailers and building differentiation with strong fresh and food programs, enhancing their healthy offering and keeping them abreast of the ever-changing nicotine space will be critical to our category management efforts moving forward. In 2019, we will build on our category management strategy with the creation of Core-Mark center of excellence, which I will cover in more depth shortly.

Finally, we substantially reduced our debt leverage over the course of '18 and we're able to generate healthy free cash flow, driven by the improvement in EBITDA and a decrease in our cash conversion cycle. Our team has done a nice job of positioning the balance sheet to take advantage of growth opportunities that may come on our way.

Now let's turn to our fourth quarter highlights. Overall results for the quarter came in consistent with our expectations, highlighted by an increase in EBITDA, continued operating expense leverage, and strong free cash flow. Overall, sales were up slightly, despite increased same-store carton declines jumping to 5%. Overall same-store non-cig sales were up over 8% year-over-year, driven by alternative nicotine and fresh food. Less the impact of the Kum & Go and Rite Aid departures, overall sales would have been up 3.1% with non-cigs at 10.1%.

We continue to maintain our positive trends in operating expense leverage with warehouse delivery and facility expense, as a percent of remaining gross profit, coming in at 62.3% for the quarter, versus 63.4% a year ago despite continued headwinds from the critical driver shortage, that is affecting distributors nationwide.

SG&A expenses were higher, driven by system conversion costs for our New England division and incremental bad debt expense, which we do not expect to reoccur. Excluding these, we achieved leverage in SG&A. From a profit standpoint, we generated EBITDA of $39 million, a 2% increase over last year's fourth quarter. Excluding one-time items, which Chris will cover in his remarks, EBITDA increased 17%. We also generated higher-than-expected free cash flow, finishing at $189 million.

Heading into 2019, we are focused on steady top line and strong bottom line execution, as well as opportunities to utilize our debt capacity on opportunistic acquisitions, if they become available. We've talked at length about the strategic priorities we have set forth for the Company. To provide more color on how we are approaching these priorities, I want to touch on a few of our key 2019 strategic levers.

First to solidify our pursuit of sales and profits, we have two areas of focus, market share growth and strategic pricing. We have named Bill Stein as the Senior Vice President of Enterprise Growth. Bill has been a major contributor to the growth of Core-Mark and is recognized as a great partner by customers throughout our industry. Bill will direct our efforts in the retention and solicitation of large national customers, regional chains and coordinate strategy around accelerating our traction with the independent customer base. Bill is also leading our initiatives around moving toward an activity-based cost model that helps wholesalers align profits with emerging categories, while lessening dependents on declining ones. I'm excited to see our efforts in these areas start to take hold as we progress through 2019. For additional color on the year, the MAPCO contract renewal, along with two mid-size chain wins rolling out on the first half of the year gets us off to a good start in 2019, but keep in mind, we will also be lapping the Kum & Go loss through the end of the first quarter as well as store transitions through the year by Rite Aid, resulting from that acquisition.

Looking ahead, you can expect us to be diligent and pursuing new chain opportunities as they materialize. And in the meantime, we have prioritized our resources against the independent and small- to mid-size chain opportunities that align well with our footprint and route structure. On the strategic M&A front, we're working to ensure we're well positioned when the time is right.

The third lever I want to discuss is cost leverage via technology. Operationally, we are focused on leveraging three key technologies in our efforts to reduce costs. The incorporation of voice technology along with upgrades, we're making to existing pick-to-light and RF systems will allow us to continue to drive improvements in warehouse performance. We're also continuing to leverage the benefits of our driver handheld system to make our drivers' job more efficient and simplify the customer check-in and credit process. And finally, we are positioned to leverage our SAP platform and launch a three-year initiative that will save nearly $4 million in annual costs once fully implemented. Chris will provide more details on that front.

The fourth lever is around human capital. We are leaning more heavily into employee engagement and establishing Core-Mark's brand as an employer of choice on the recruiting trail with an increased focus in digital recruiting. We are leveraging data to better manage and forecast our seasonal workloads, improve the screening and quality of our hires, and understand the levers that drive retention. We made progress in 2018 with a 6% reduction in attrition, and expect similar results in the coming year.

Finally, I want to circle back on my earlier comment about the development and construction of the Core-Mark center of excellence. The convenience store industry continues to be resilient amid the sea of change that surrounds the North American retail landscape. Consumer purchase behaviors once changing at a predictable pace are now doing so at hyper-speed. Technology innovations are increasingly critical to a successful retail strategy and food continues to be an important differentiator.

We think we are in a unique position to fill a demand from retailers for a next level experience. Core-Mark's center of excellence will operate from four pillars. The first is providing a food and beverage experience and will allow retailers to benchmark their own offer, develop new menu and product ideas, test new equipment, and work to establish a point of differentiation.

Second is providing cutting-edge product mix optimization and Planogram solutions for the center store. Third is educating retailers on the total tobacco and nicotine opportunity, including regulation, emerging products and categories and assist them in strategy development. And the fourth and final pillar is data. We believe we have the most diverse data set available for the industry today and we're working to leverage that into actionable solutions for our retailers. We know from the strong response to our category management tools that our retailers value solution-oriented partners. We believe the Core-Mark center of excellence will elevate Core-Mark's status as the wholesale partner retailers choose in their quest to establish differentiation in the competitive retail environment in which they operate.

Wrapping up, we delivered on expectations in Q4 and reflecting our 2018 as a whole, we are proud to have delivered a 21% increase in our EBITDA, while improving our balance sheet to better allow us to entertain growth opportunities, as they develop. Despite operating in a sluggish industry from a sales perspective, and anticipating market share opportunities are likely to be in smaller bites near term, we have a positive outlook on our ability to deliver good returns in 2019, supported by growing non-cigarette sales at a healthy clip, leveraging our costs and executing on our growth strategies. We look forward to keeping you posted on our progress.

And now, I will turn it over to Chris to provide more details on our financial results.

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Thank you, Scott and good morning, everyone. I'll review the key drivers of our fourth quarter financial results and then provide details on our guidance for 2019. And first looking at the financial highlights for the full year, we delivered a 21.4% increase in adjusted EBITDA in 2018 on sales growth of 4.5% and we generated over $189 million of free cash flow, an increase of $148 million over 2017. We also significantly reduced our debt level and we entered 2019 with the financial flexibility needed for us to execute on our growth strategies.

Now let's look at the fourth quarter results compared with the prior year's fourth quarter. Net income grew 12% to $12.1 million or $0.26 per share, compared to $10.8 million or $0.23 per share last year. LIFO expense was $5.2 million or $0.08 per share in the quarter, compared with $0.10 last year. Earnings per share, excluding LIFO expense, was $0.34 compared with $0.33 in last year's fourth quarter. There were several noteworthy items I'd like to call out that impacted year-over-year comparisons of our financial performance in the fourth quarter.

The systems conversion costs and higher bad debt charges, Scott referenced earlier, impacted Q4 results by $0.02 per share and $0.03 per share, respectively. Also in Q4 2018, we had a foreign exchange gain of $0.02 per share and tax benefits of $0.05 per share from a lower tax rate and discrete tax adjustments. In Q4 2017, we benefited from an income tax gain of $0.32 per share related to the tax law changes and an OTP tax gain of $0.03 offset by the pension termination charge of $0.25 per share. Excluding these items, EPS would have been $0.32 per share in Q4 2018 versus $0.23 in Q4, 2017, representing an increase of over 39%. Adjusted EBITDA in the fourth quarter reached $39 million compared to $38.1 million in last year's fourth quarter.

Adjusting for the system conversion costs and bad debt charges in Q4 2018 and the OTP tax refund in Q4 2017, adjusted EBITDA increased $6.1 million or approximately 17% for the quarter. And looking at our top line performance, net sales increased 0.4% to $4.09 billion in the quarter in a challenging market environment for C store retailers.

The expiration of the Kum & Go business in April 2018 impacted non-cigarette and cigarette sales by 3.8% and 1.4% respectively in the quarter. Cigarette sales were down 2%, driven by a decline in same-store carton sales of approximately 5% for the quarter. Non-cigarette sales increased 5.7% or 10.1% adjusted for Kum & Go and Rite Aid, driven by an 8.4% increase in same-store sales and market share gains.

The increasing popularity in alternative nicotine products drove a 50% same-store sales increase in our health, beauty and general product category in Q4. Although this was higher than the year-over-year increase we saw in Q3, we expect increased regulation of alternative nicotine products and tough comps will impact year-over-year growth as we move through 2019. Candy and fresh also had solid same-store sales growth in the quarter.

Gross profit increased 3.6% to $217 million from $209.4 million, driven primarily by an increase in non-cigarette sales to existing customers. Gross profit margin expanded 17 basis points to 5.31%, primarily due to the sales mix shift to higher margin non-cigarette products. Remaining gross profit also increased 3.6% as incremental cigarette holding gains and reduction in LIFO expense in Q4 2018 were offset by a $2.7 million OTP tax refund in Q4 2017. Cigarette remaining gross profit increased $3 million or 5.6% to $56.6 million, while non-cigarette remaining gross profit increased $4.7 million or 3% to $162.5 million over the last year's fourth quarter. While we still have more work to do, we saw continued progress in managing our costs in the quarter, particularly our warehouse expense as we lower turnover and improved picks per hour.

Total operating expenses were $200 million for the fourth quarter of 2018, compared to a $194.3 million in last year's fourth quarter. The modest increase in operating expenses included an increase in bad debt charges of $1.8 million, higher transportation costs and $1.4 million in costs primarily to convert our Northern New England division onto our operating system, which we believe will improve efficiencies going forward.

Operating expenses came in at 91.3% of remaining gross profit in the quarter, compared with 91.9% in last year's fourth quarter. Our long-term debt was reduced by $166.7 million over the year to a balance of $346.2 million at the end of 2018, just over two times our adjusted EBITDA. This left us with $328.9 million of borrowing capacity available under our credit facility, excluding the facility's $200 million expansion feature. The substantial reduction in debt was achieved due to the $189 million of free cash flow we generated during the year. $148 million increase in free cash flow was driven by higher EBITDA versus last year, a reduction in working capital mainly driven through inventory and accounts receivable, and a $15 million income tax refund related to 2017.

Capital spending was about $22 million for the year, which was below our previous estimate of $30 million, due to the deferral of certain projects to 2019. We repurchased 87,000 shares in the fourth quarter of 2018 at an average price of about $34, and a total of 588,489 shares for the year at an average price of $26.20. We have $22.4 million remaining in the buyback authorization plan as of today, and we expect at a minimum to repurchase shares in 2019 to offset dilution from shares issued to management.

As outlined in our news release, our adjusted EBITDA guidance for 2019 is a range of $176 million to $182 million, representing growth of 7% on the low end and 10.5% on the high end. Diluted earnings per share is expected to be between $1.09 and $1.19. EPS, excluding LIFO expense, is expected to be between $1.50 and $1.60 per share, representing an increase between 8% and 15% over 2018. Our top line expectation for 2019 is between $16.8 billion and $17 billion, representing an increase between 2.5% and 3.7% over 2018. Our guidance does not assume the addition of any large new customers or the acquisition of a business.

As Scott mentioned, leveraging cost through technology is a key lever for us. We've made investments in SAP and other supporting technologies over the past couple of years with the intent of automating and centralizing much of the work of the finance group. We expect to start seeing a return on this work in 2019, as we complete the first phase and our guidance includes related SG&A cost reductions of $500,000 to $1 million. We expect to achieve additional cost savings of up to $4 million, once all phases are completed in 2021.

We expect free cash flow to continue to be at healthy levels for the year. At this early stage, we anticipate generating approximately $100 million in free cash flow, which reflects our working capital needs for the year except for any large year-end inventory purchases. These levels provide capital allocation flexibility as we balance investments in our business to grow market share, return capital to shareholders through stock repurchases and cash dividends and pursue potential acquisition opportunities that fit our criteria.

Looking ahead to 2019 and longer term, I believe we are well positioned to deliver solid earnings growth, a gaining market share, expanding margins and continuing to increase operating expense leverage through increased productivity and other efficiencies.

Operator, you can now open the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Ben Bienvenu from Stephens. Please go ahead.

Ben Bienvenu -- Stephens -- Analyst

Hey, good morning everybody.

Scott E. McPherson -- President and Chief Executive Officer

Good morning, Ben.

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Good morning.

Ben Bienvenu -- Stephens -- Analyst

I wanted to ask about the guidance for next year. You mentioned that it does include cigarette holding gains pretty usual, but no other holding gains. I know, Hershey recently announced pricing increases. I just wanted to get a sense of how that might impact your overall candy business and what that could mean relative to your guidance for 2019?

Scott E. McPherson -- President and Chief Executive Officer

Yes, Ben, we assume normal inflationary gains. We didn't assume any major candy price increases. I know Hershey and some other folks have taken increases on some other ancillary brands, but we haven't seen any increases across the whole network. So the guidance assumes normal inflationary increases, kind of across the board as we've seen over the last couple of years.

Ben Bienvenu -- Stephens -- Analyst

Okay, fair enough. And then, you mentioned that you had two small/mid-size chain wins at the end of 2018 that are going to roll into 2019. Irrespective of those two wins, what does the contract pipeline look like for this year, you said no large contracts, but just -- if we could get a better sense of, if there are any other mid-size chains that are either up for renewal or -- and if there's an RFP process currently ongoing, that'd be helpful.

Scott E. McPherson -- President and Chief Executive Officer

Yes. So you're correct. There is no real big disclosable contracts that are up for renewal or that we're working on, but there are a number of mid-sized chains that we're working on, currently. But as far as ones that we have that we are currently servicing, we have a very few that are in a bid cycle this year. We have a handful of them for next year, but this is again a pretty quiet year for our incumbent customers. But we definitely are engaged in a number of bids in the small- to mid-size range on various chains across the country.

Ben Bienvenu -- Stephens -- Analyst

Okay, great. Congratulation and best of luck.

Scott E. McPherson -- President and Chief Executive Officer

Thanks, Ben.

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from Kelly Bania from BMO. Please go ahead.

Kelly Bania -- Analyst -- Analyst

Hi, good morning. Thanks for taking my questions. Just wanted to also ask about 2019 guidance, as we think about your top line outlook. Maybe just a little bit more color on what you're planning for between cigarette sales, non-cigarette sales, same-store cartons and how much that -- you talked about the alternative nicotine possibly slowing down and cycling some things next years, maybe just elaborate on those factors for us?

Scott E. McPherson -- President and Chief Executive Officer

Sure. So, yes, so a couple of things, Kelly, that I called out on my script. I mean, one is we're obviously lapping the Kum & Go and we are going to have some additional Rite Aid transitions this year. And then as far as cigarettes go, we assumed a little higher carton decline this year than we did last year more in the 4% to 5% range. So those three things kind of create a headwind in the $300 million to $400 million range. And then, obviously from a growth standpoint, we've assumed pretty healthy non-cigarette sales growth and then that's driven by independent account wins, it's driven by mid-size and small chain wins of which we've called out a couple that -- we've had good traction on already. As far as the nicotine category, I think we -- obviously the FDA had their ruling that they wanted to ban flavors that impact so far as I look at the kind of the first couple months post flavors, hasn't been as significant as I thought it might be. But also I don't anticipate a year like last year where Juul went from being a $200 million company to a $1 billion company in a year.

So right now, I would anticipate that our revenues in that area will be flat to up slightly compared to last year and that's kind of how we've looked at it from a guidance standpoint.

Kelly Bania -- Analyst -- Analyst

Okay. That is very helpful.

Scott E. McPherson -- President and Chief Executive Officer

Okay.

Kelly Bania -- Analyst -- Analyst

That's very helpful, yes. And then, just wanted to dive a little deeper on what you're seeing in freight. I mean, I think you called out some cost pressures there -- at least on the transportation side, but it seems like you're managing it pretty well. So what are you planning for in terms of freight and transportation costs in '19? And it sounded like turnover was tracking better, maybe just -- what kind of wage increases you're dealing with on the driver side? I mean how you're thinking about progressing through 2019?

Scott E. McPherson -- President and Chief Executive Officer

Yes, so there's really two sides of freight Kelly. Most of our freight, we handle internally. So that's our own drivers, our owned fleet and we've definitely seen a little bit of wage pressure. We've paid our drivers fairly well and really kept up with the inflationary wage rates that we've seen over the years. So we will see a tremendous wage inflation there. The biggest pressure I see on our own fleet and our own drivers is just the driver pressure in the market. Like I said, we did do a better job with turnover. We're working to develop drivers internally.

So that's a really big focus. If we can continue to drive down turnover, it will really help our costs because it allows us to leverage our routes and get more product on our routes. The other piece of freight is kind of third-party freight, which is a lot of what you hear about in the news in the industry. We don't do a lot of third-party freight. The only place we really do that is through our redistribution facilities, our Arctic and EMEA facilities, which we have three across the country and that freight's definitely gone (ph) up a lot. It's gone up in the double-digit growth range. What we've done there is, in one of those facilities right now, we've taken all that freight in-house. So we're shipping all that freight internally and we're going to evaluate that and we may do that in the other two as well just to offset the common carrier charges that we're seeing. So that's kind of the picture on freight.

Kelly Bania -- Analyst -- Analyst

Okay, thanks. And just a follow-up on the customer contracts outlook, I thought that you said last quarter that there was some that were up for negotiation of yours, some significant ones toward the end of '19 and into early '20, has anything changed there?

Scott E. McPherson -- President and Chief Executive Officer

No, we do have one that's up for negotiation that is at the end of 2019. One large one.

Kelly Bania -- Analyst -- Analyst

Okay, thank you.

Operator

Our next question comes from Chris Mandeville from Jefferies. Please go ahead.

Chris Mandeville -- Jefferies -- Analyst

Good morning. Chris, on the systems conversion, on what was Pine State, I suppose, as we look to 2019, how should we think about any other future systems conversions for example in the former Farner-Bocken facilities and how that might influence OpEx growth in the coming year?

Scott E. McPherson -- President and Chief Executive Officer

Yes, Chris this is Scott. We don't have any major system conversion plan in Farner-Bocken today. We're really happy with their operating system. We are doing some things with their system, so we can create some transparency among our customers, but we don't have anything as far as major system conversions planned in 2019. Other than obviously Chris called this out on the call is the corporate office move, there's definitely transition costs for that in our plan for '19.

Chris Mandeville -- Jefferies -- Analyst

I appreciate that. And then on the bad debt expense or increases that you observed in Q4, I guess I'm just kind of curious if you take a step back and you combine that with the recent news around how independent stores within the channel declined 2% in 2018. If I recall correctly, that's probably the first decline we've seen in nearly a decade. So are you all concerned about your core customer heading into 2019, in 2020? How should we think about that and your ability to continue to grow the top line between new business within that group versus just simply further penetration of existing accounts and maybe how that relates to your 3% sales guide for the year?

Scott E. McPherson -- President and Chief Executive Officer

Yes. So I don't see. I mean there was a -- what I think 1,000 store count change. So it's -- the last couple years has been a 1% or less growth. So I kind of look at the store count as being basically flat for the last three or four years really. That said, we still have a very small market share among independents and overall. So, I think our ability to grow via independent gains, via acquisition or larger gains is still there and very strong. So as far as the bad debt part of the question, those were a couple what I would call a little more unique circumstances. We haven't seen anything trend wise. It indicates that there's something new that we have to be concerned about in the market. We had a couple individual customer situations that we're pretty sizable that impacted the bad debt.

Chris Mandeville -- Jefferies -- Analyst

Okay. Can you remind me what your market share is within that independent segment?

Scott E. McPherson -- President and Chief Executive Officer

We're in the low double digits in the independent segment.

Chris Mandeville -- Jefferies -- Analyst

Got it. And then just the last ...

Scott E. McPherson -- President and Chief Executive Officer

We're in the -- just to clarify that low double digits. We are more like we are in the 15% (ph) range.

Chris Mandeville -- Jefferies -- Analyst

Right. Yes. (inaudible) much. Appreciate that. And then the last one from me. I guess, I'm just kind of curious with respect to (inaudible) announcement the other day around them getting involved in the marijuana business or cannabis if you will? I know you service the Western portion of Canada. So you won't have immediate kind of overlap with where they are going to be providing this new offering? But just generally speaking, how is Core-Mark thinking about this as a potential opportunity longer term?

Scott E. McPherson -- President and Chief Executive Officer

Yes, I mean I think my thought on that is, if it is federally legal or provincially legal for us to sell and distribute, it would definitely be something that we would look at and welcome that opportunity. In Canada, the provinces have primarily used their internal package distribution system to distribute and we looked at that opportunity early on and didn't -- there really wasn't an opportunity for us in Canada. Right now, obviously it's not federally legal in the US. So until that time or until there is an opportunity like that, I don't think it's something that we would get involved with. But if it comes, we would welcome it. Obviously Altria and others are very interested in that space. So hopefully, they have in-roads and that could be something we can look at in the future.

Chris Mandeville -- Jefferies -- Analyst

Okay, thank you very much. Appreciate it.

Operator

Our next question comes from Ben Brownlow from Raymond James. Please go ahead.

Ben Brownlow -- Raymond James -- Analyst

Hi, good morning. On the SG&A, just trying to get a little bit better handle around your growth expectations there. Just taking into account the transition cost and the benefits from automating the processes and also in that latter respect, how should we think about past the $1 million automation benefits you get this year and how should we think about the remaining $3 million to get to that $4 million by 2021, just from a timing standpoint?

Scott E. McPherson -- President and Chief Executive Officer

Yes. So I think Chris called out in his script $500,000 to $1 million this year, is what we have baked into the budget. When you think about the move costs and the growth in SG&A this year, we have about a 3% to 4% growth in SG&A. That includes the move costs that we have slated for the corporate office move for this year. So that's obviously driving a pretty good chunk of that growth.

When I look forward to the next three years on the technology leverage for general, really this first year is kind of a mid-year we get it phased in. And that's a $500,000 to $1 million opportunity on an annualized basis. You think about that as more of a $1 million to $2 million opportunity in year two. And then, we get into the final phase in year three and that's where we get up to the $4 million in annual savings.

Ben Brownlow -- Raymond James -- Analyst

Great, thank you for the color.

Scott E. McPherson -- President and Chief Executive Officer

You bet.

Operator

(Operator Instructions) Our next question comes from Chris McGinnis from Sidoti & Company. Please go ahead.

Chris McGinnis -- Sidoti & Company -- Analyst

Good morning and thanks for taking my questions. A nice quarter.

Scott E. McPherson -- President and Chief Executive Officer

Thanks, Chris.

Chris McGinnis -- Sidoti & Company -- Analyst

Just wanted to ask about M&A and one of the opportunity, but also kind of your appetite at the moment to maybe execute on one at this point and just given you have the move this year and stuffs like that? Thanks.

Scott E. McPherson -- President and Chief Executive Officer

Yes, so, first off, I would say that the move itself has gone really well and our team has done a great job of managing through that. And our corporate offices opened in Texas today. We have about half of our workforce or will have in the next couple weeks down there. But like I said, the team has done a really nice job managing that transition, which will be complete really in May -- by the end of May.

So that said, I don't see that as a deturn (ph) or disruption to us, approaching any M&A opportunities at all. From the M&A front, we have through the last 10 or 12 years, had a very disciplined approach. We're not going to run around and chase opportunities and throw money at it. But the one thing we do this year is reposition the balance sheet in a way where we definitely have the horsepower to go out and make a smaller or larger acquisition, if the opportunity is there. And it's the right opportunity for the Company. So we're definitely always having those conversations and looking at those opportunities and hopefully we'll be able to get something going in the next -- in the coming months.

Chris McGinnis -- Sidoti & Company -- Analyst

Thank you. And just one question around -- just the smaller -- small business or the independent operators. Can you maybe just talk a little bit about that growth that you saw maybe in the quarter and how that rate of growth is versus your expectations and any initiatives kind of going forward to help drive that? Thanks.

Scott E. McPherson -- President and Chief Executive Officer

Yes, I'll be real honest with you, Chris. I wasn't overly pleased with how we performed in 2018 around the independent customer base and that is why I made some restructuring moves in the Company and realigning Bill Stein, who has really been a growth driver for the Company. So he is solely focused on driving that independent mid-size and small chain growth and working with our larger key partners out there. So it's an area that I think we have a big opportunity and that we didn't capitalize on in 2018 and really a focus for '19.

Chris McGinnis -- Sidoti & Company -- Analyst

Thank you. And then just one last question, just maybe around FMI. Can you just give an update on where you are this year versus last year or in 2018 versus 2017? Maybe, I don't know if there's any metrics you can give around it in terms of more acceptance, just any color on that base (ph).

Scott E. McPherson -- President and Chief Executive Officer

Sure. So from a store count standpoint, we were just -- our goal is 4,500 and we came in at like 4,450 or something, we're about 50 stores short of our goal. The two real drivers for me on FMI that I pay attention to is our churn and those stores churn at a significantly lower rate about half the rate of our regular independent store might. And the other piece of that is, is there a non-cigarette sales growth this year. We're almost two times what the non-FMI stores did as well. So those are the really the two key metrics that I lever that I look at. And the other thing that I would say that the FMI group did this year is they really helped us lead the efforts around educating the alternative nicotine space and making sure that our customers have a good understanding of what was going on in that arena. So that group really did a lot of things for us this year.

Chris McGinnis -- Sidoti & Company -- Analyst

Great, thanks for the color. Appreciate and good luck in Q1.

Scott E. McPherson -- President and Chief Executive Officer

Thank you.

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

We have a follow-up question from Chris Mandeville from Jefferies. Please go ahead.

Chris Mandeville -- Jefferies -- Analyst

Thanks for the follow-up and apologize if I missed this. But, Chris, can you remind me just what the actual same-store sales number was for non-cigarette? I thought I heard 8.4%, but I wasn't sure if that was purely same-store sales or same-store sales plus new business. And then what was the average price per carton increase in the quarter?

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

So first, the same-store sales growth for the fourth quarter was 8.4% all-in for the year was 7% -- just a little over 7%. And then the price inflation on cigarettes, is that the second part?

Chris Mandeville -- Jefferies -- Analyst

Yes, price per carton, if you did or you have it.

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Yes, I mean -- it's about 2.5%, right? It's about 2.5% to 3% inflation.

Chris Mandeville -- Jefferies -- Analyst

And is that's kind of the general run rate that we should be expecting for '19? Or do you anticipate maybe big tobacco leaning a little bit more heavily in price as you are expecting a 4% to 5% volume decline?

Scott E. McPherson -- President and Chief Executive Officer

Yes. Given the price increase, we -- the most recent one we saw in February, it looks like we're going to be tracking to about the same inflation so far this year.

Chris Mandeville -- Jefferies -- Analyst

Got it. Thanks guys.

Operator

We're showing no further questions. I will now turn the call over to Ms. Milton Draper for closing remarks.

Milton Gray Draper -- Director of Investor Relations

Thanks for everybody's interest. If you have any follow up questions, you can reach us at 650-589-9445. Thanks. Bye-bye.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating and you may now disconnect.

Duration: 43 minutes

Call participants:

Milton Gray Draper -- Director of Investor Relations

Scott E. McPherson -- President and Chief Executive Officer

Christopher M. Miller -- Senior Vice President and Chief Financial Officer

Ben Bienvenu -- Stephens -- Analyst

Kelly Bania -- Analyst -- Analyst

Chris Mandeville -- Jefferies -- Analyst

Ben Brownlow -- Raymond James -- Analyst

Chris McGinnis -- Sidoti & Company -- Analyst

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